Two of Canada's securities regulators agree to merge

OTTAWA - There were handshakes all around late last month as the Investment Dealers Association of Canada and Market Regulation Services Inc. announced they have approved in principle a merger proposal to create a new industry self-regulatory organization.

"The new organization will further strengthen self-regulation within the Canadian securities industry and enhance the already strong levels of investor protection and market integrity," Bill Moriarty, chairman of Toronto-based Market Regulation Services, said April 26.

"Combining member and market regulation will enhance the quality of self-regulation in Canadian markets," said Brian Porter, a past chairman of the IDA in Toronto. "The initiative is timely, given the recent reorganization of the IDA, the review of the SRO structure by Canadian and U.S. securities regulators and the ongoing national discussion about the need to harmonize Canada's regulatory system."

Provinces must sign off

The deal will require approvals by Canada's provincial securities commissions, which will have to recognize the new regulator.

Using sophisticated surveillance systems that provide statistical and rule-based alerts, Market Regulation Services, commonly known as RS, monitors trading in real time for compliance with trading rules. If a rule is breached, RS has the power to reverse the trade and take disciplinary action. For its part, the IDA also regulates the activities of investment dealers in terms of both their capital adequacy and business conduct.

Along with the proposed merger, the IDA is breaking itself into two. Critics said that representing the industry while regulating it posed a conflict of interest, so member firms voted Dec. 14 to create a new self-regulatory organization and also a separate trade association to represent the Canadian securities industry. Capital Markets Regulation of Canada will be a stand-alone enforcement arm. A new trade association will retain the IDA title.

This leads to some confusion, according to industry observers.

"At the IDA SRO, we are not now using the name CMR, since we will need to seek regulatory approval for a new name," said Connie Craddock, the IDA's vice president for public affairs. "We will do this at the time that we seek regulatory approval for the merged IDA/RS SRO. In the meantime, we continue to use the name IDA, and the new trade association is using the name IDA-Industry Association. [I] hope this clarifies a not entirely clear or simple situation."

Following the December vote splitting his organization, IDA chief executive Joe Oliver presciently said, "Today's decision removes an impediment to consolidation with Canada's other SROs, a highly desirable initiative in the public interest."

He said recently that there are benefits to merging two organizations that, in many cases, regulate the same brokerage firms. "A firm takes an order from an individual and then trades on a marketplace. There are gaps and overlaps that we're going to address," Mr. Oliver said.

The IDA and RS are among the three associations to which some provincial securities commissions delegate certain aspects of securities regulation. The other is the Mutual Fund Dealers Association of Canada in Toronto. The proposed new entity could leave the door open for a new set of merger talks with the MFDA; discussions last year between it and the IDA led nowhere.

"The governance structure will be such that we can accommodate other entities, but there is no push on to bring them in at this point," said an IDA spokesperson.

More steps

The merger effort is not the only important step Canadian securities regulation is taking.

The Canadian Securities Administrators, an interprovincial body based in Montreal that acts as the de facto national securities regulator, is seeking comments on a proposed national rule that would consolidate and harmonize in a single national instrument most of the requirements and restrictions governing takeover bids and issuer bids, and related early-warning requirements.

"We believe that harmonizing these requirements will ease the regulatory burden of issuers by reducing the sheer number of requirements that would otherwise require consideration," according to the CSA.

And new governance legislation for financial institutions went into effect April 27, when federal Finance Minister Jim Flaherty announced that legislation to modernize the governance standards for banks, insurance companies and other financial institutions will begin to take effect.

"The financial services sector is one of the key foundations of a modern economy," Mr. Flaherty said. "Canadian financial institutions need to be equipped with the same governance tools that are available to other companies to compete in the global financial marketplace."

The new rules will facilitate electronic communications and electronic participation in shareholder meetings, and would harmonize rules for insider reporting and prospectuses with the various provincial securities rules.